Compounding refers to the ability of money to increase exponentially over time by the repetitive additions of earnings to the principal amount. This happens because the interest amount is not withdrawn. Instead, it gets reinvested to earn additional returns. A higher compounding period leads to a higher compound interest.

Here is an example for better clarity: Say you invest ₹10 lakhs in a company and the share prices increase by 20%. So, the value of your investment increases to ₹12 lakhs. If you decide to hold the stock and the shares increase by another 20%, your investment will grow to ₹14.4 lakhs.

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